Skip to main content

INVESTMENT FOCUS-Press here, Mr Carney, for lower volatility?

In the struggle to explain this year's collapse in volatility and volume in financial trading, one newly-nominated culprit is central banks' intent to use every tactic available short of raising interest rates too soon.

It sounded like a deeply contrarian view on Friday after comments by Bank of England Governor Mark Carney, but a study by analysts from market heavyweights HSBC this week argued that the use of macroprudential steps will make central bank interest rates in general less volatile in future. Implicitly that may mean markets see less marked swings.

The global economy is right at the point, as the economic fates of Japan, Europe and the United States diverge, when an upturn in trading action could be expected due to the growing chances for arbitrage between future interest rates.

Yet volatility, which traders depend upon for profits, is at rock bottom. Trading in currencies on the biggest platforms has fallen by a third to half in the past year; options contracts betting on volatility are around all-time lows.

Even with a blip higher stemming from Carney's comments on Friday, sterling implied volatility was glued to its lowest levels on record, less than a quarter of highs reached in 2008.

There are numerous theories as to why, ranging from the growth in machine-driven trading to the scaling back of banks' mandates to invest on their own account, disappointment at the pace of the U.S. recovery or allegations of market manipulation that have pushed traders back inside their shells.

The HSBC study argues that one big factor may be that central banks are in the midst of a regime change of their own.

"Macroprudential policy, which aims to maintain financial stability through targeted measures, is already part of the mix and is set to grow ever more important," HSBC analysts said in the paper this week.

"It will, in part, replace interest rate moves and since FX has traditionally been very sensitive to rates, the repercussions for the currency markets will be significant."

HEAT RELEASE

Thereafter, it all gets a bit cloudy.

New Zealand, Canada and Norway have all used targeted measures to tighten their grip on mortgage lending and take some of the heat out of their property markets but in the end wound up raising borrowing costs anyway.

Indeed the New Zealand central bank delivered another market shock this week in pledging it still has a lot more to do.

Likewise, while UK finance minister George Osborne promised further steps to target house prices in a speech on Thursday, Carney followed less than an hour later with a U-turn on policy that looked very like a promise of higher borrowing costs this year.

This all goes to the traditional thinking of many market players on macroprudential policy: it is very nice in theory but has never worked except as a distraction before we return to the real business of managing demand through interest rates.

_0">

Yet it is not just HSBC who says that view is outdated.

_1">

"What you have to recognise about macroprudential measures is that they are a response to the failure of inflation-targeting, which does not work and is too blunt an instrument," said Neil Mellor, a currency market strategist with U.S custodial lender Bank of New York-Mellon in London.

_2">

"You can certainly point to the failure of measures in the past, but if for example we can even partially enhance economic stability over the course of the cycle then that will be a good thing. I think we will see a lot of tinkering over the next few years."

_3">

As with so much of policymaking since the 2008 crisis, this all stems substantially from the need to find ways to do more to address the imbalances and risks in the detail of economies that interest rates can just wash over.

_4">

Much of the HSBC study concerns itself with trying to establish the likely impact of the longer-term and more consistent use of macroprudential measures.

_5">

But, as ever, there are imperatives for officials like Carney in what is right in front of his nose: keeping the British economy going as fast as he can without the wheels coming off either the banking system or inflation.

_6">

Notwithstanding Thursday's words, if he can find any way to accomplish that without having to deliver on the threat of higher rates then surely he will.

_7">

"As a central banker you have to look at the overall picture of the economy," says Andrew Wilson, CEO of Goldman Sachs Asset Management in London.

_8">

"I am not sure it will reduce volatility but if macroprudential policy dampens, for example, house price inflation then it may mean monetary policy needs to do less to weaken demand in the economy in general." (Editing by Ruth Pitchford)

_9">

Popular posts from this blog

Study Abroad USA, College of Charleston, Popular Courses, Alumni

Thinking for Study Abroad USA. School of Charleston, the wonderful grounds is situated in the actual middle of a verifiable city - Charleston. Get snatched up by the wonderful and customary engineering, beautiful pathways, or look at the advanced steel and glass building which houses the School of Business. The grounds additionally gives students simple admittance to a few major tech organizations like Amazon's CreateSpace, Google, TwitPic, and so on. The school offers students nearby as well as off-grounds convenience going from completely outfitted home lobbies to memorable homes. It is prepared to offer different types of assistance and facilities like clubs, associations, sporting exercises, support administrations, etc. To put it plainly, the school grounds is rising with energy and there will never be a dull second for students at the College of Charleston. Concentrate on Abroad USA is improving and remunerating for your future. The energetic grounds likewise houses various

Best MBA Online Colleges in the USA

“Opportunities never open, instead we create them for us”. Beginning with this amazing saying, let’s unbox today’s knowledge. Love Business and marketing? Want to make a high-paid career in business administration? Well, if yes, then mate, we have got you something amazing to do!   We all imagine an effortless future with a cozy house and a laptop. Well, well! You can make this happen. Today, with this guide, we will be exploring some of the top-notch online MBA universities and institutes in the USA. Let’s get started! Why learn Online MBA from the USA? Access to More Options This online era has given a second chance to children who want to reflect on their careers while managing their hectic schedules. In this, the internet has played a very crucial in rejuvenating schools, institutes, and colleges to give the best education to students across the globe. Graduating with Less Debt Regular classes from high reputed institutes often charge heavy tuition fees. However onl

Sickening moment maskless 'Karen' COUGHS in the face of grocery store customer, then claims she doesn't have to wear a mask because she 'isn't sick'

A woman was captured on camera following a customer through a supermarket as she coughs on her after claiming she does not need a mask because she is not sick.  Video of the incident, which has garnered hundreds of thousands of views on Twitter alone, allegedly took place in a Su per Saver in Lincoln, Nebraska according to Twitter user @davenewworld_2. In it, an unidentified woman was captured dramatically coughing as she smiles saying 'Excuse me! I'm coming through' in the direction of the customer recording her. Scroll down for video An unidentified woman was captured dramatically coughing as she smiles saying 'Excuse me! I'm coming through' in the direction of a woman recording her A woman was captured on camera following a customer as she coughs on her in a supermarket without a mask on claiming she does not need one because she is not sick @chaiteabugz #karen #covid #karens #karensgonewild #karensalert #masks we were just wearing a mask at the store. ¿ o